 "Can Oyo find room to grow?")
| BIG BUSINESS |
Source: Industry estimates, Oyo |
Read more from our special coverage on "OYO ROOMS"
Agarwal, a college dropout who started Oravel Stays, which owns Oyo, at age 17, insists such feedback is not more than a trickle. In a recent interview, he pointed out that Oyo got high ratings on sites such as Trip Advisor. Also, he claimed that more than 50 per cent of Oyo subscribers in Gurgaon were repeat customers. Oyo had blacklisted a few hotels over quality slippages, he said.
But that's the least of the string of worries Agarwal faces: there is talk that Oyo's valuation has slid amid a global meltdown, its proposed acquisition of rival Zo Rooms may have tuned cold, and some of its partner hotels are ready to jump ship. Also, popular travel portals like Makemytrip, Yatra and Ibibo have struck Oyo off their listings as they prepare to enter the segment on their own.
Though it is backed by marquee investors such as Softbank, Sequoia, Lightspeed Venture Partners, Greenoaks Capital and others, the buzz in the market is that Oyo will get much lower than the $400 million it had set out for not too long ago in its next round of funding. It was eyeing valuation of at least $600 million during the new fund-raising round, but that may have been ambitious.
Valuation concerns
This comes after Morgan Stanley marked down the value of its investment in Flipkart, the homegrown poster boy of e-commerce, by 27 per cent to $58.9 million between June and December. According to a recent survey of private equity and venture capital funds done by VCCircle, 92 per cent of VCs believe that valuations of start-ups going in for Series B, C or D rounds of funding will drop, which will make exits more difficult.
Apart from slowing down expansion, this, experts say, could hurt Oyo's plans to acquire rival Zo Rooms for a stock swap of 7 per cent. One news report insists there is only 60 per cent chance of the deal getting completed because Zo has downsized significantly, which has made the shareholders of Oyo to rethink their decision.
Oyo COO Abhinav Sinha says, "Fundraising has never been a challenge for Oyo….In the near future, at an apt time, we will actively engage in fund-raising.'' Dismissing any talk of valuation mark down, Sinha is confident that even in tough market conditions, an original disruptor like Oyo will be valued highly.
On the Zo deal, Sinha is not so forthcoming. "At present, we have no comment to offer on this,'' he says. Things have changed for sure after Oyo entered a deal some months ago to acquire Tiger Global-backed hotel aggregator Zo, which had more than 10,000 rooms. That would have made Oyo stronger in the budget space. But both sides have maintained a cryptic silence, though Oyo's lead investor Softbank made the acquisition public in an investor presentation earlier this year.
Partnership problems
In addition, Oyo is getting blacklisted, going by a recent report. It said some 200 hotels terminated their relationship with aggregators such as Oyo and Zo over issues like undercutting, unpaid dues and unmet promises. Sinha, for his part, dismisses it as "completely baseless''. The churn rate at Oyo "is extremely low'', Sinha says. "We have been expanding our network aggressively every month.''
Indeed, the partner network has grown at a fast clip. It now has tie-ups with more than 5,500 hotels, up from 2,500 hotels just six months ago. There are more than 50,000 rooms under the Oyo brand. It is this scale that makes Oyo look larger than the largest hospitality chain of India, Taj Hotels, which has around 16,500 rooms around the globe, of which 13,000 are in India.
Sinha claims that Oyo's "partner hotels have witnessed increase in occupancy and quality of the property itself". Siddharth, who owns Daichi, a 12-room hotel in Dehradun, of which nine have been assigned to Oyo, says: "I have learnt a lot from this partnership.'' Gaurav Chhabra, who runs Regalia in Gurgaon and has given out a third of the 18-room property to Oyo, says the partnership has helped his business.
The learnings are about basic hotel standards on everything from the thickness of mattress to quality of linen, size of picture in the room to the level of lighting. Oyo has a checklist of 200 that every hotel partner must adhere to. For instance, every Oyo room must have a runner over the bed to give it a premium touch, 24X7 free wi-fi is a must to make the deal attractive to a business traveller and complimentary breakfast has to be weaved in to make it a wholesome package.
For tariff between Rs 999 and Rs 2,500, it may look like a steal to the guest, but hoteliers do feel the pinch. The tie-up looks good during the lean season, but the tariff in the peak season must be increased to make it a profitable business, point out both Sidhharth and Chhabra.
Oyo, which on an average keeps around 15 per cent of the tariff as commission (though it could go up or down depending on a deal) while the remaining 85 per cent goes to the hotelier, is learnt to be open to the idea of variable tariff in the times to come.
Oyo's turnover for 2014-15 was Rs 2.4 crore, up from Rs 51 lakh in the previous fiscal. To turn a unicorn and also profitable, it must up the tariff, points out an analyst. Some hotels have in fact already had their way and have breached the Oyo cap of Rs 2,500 to charge up to Rs 3,000 a night.
Dynamic pricing based on demand, a norm in the hospitality industry, may follow, but for now Oyo's most attractive feature is its low price. It could keep the rates much lower than most others because the investment on properties has been borne by the hotels, and also Oyo didn't face much trouble in raising funds till now. But with the market turning tight, that could change in the future.
In another development, travel portals such as MakeMyTrip, Yatra and Ibibo dropped Oyo a few months ago. Many of them are opening their own budget hotels and would like to promote those, rather than divert traffic to Oyo or Zo. That's a loss for an aggressive player like Oyo, which is currently getting as much as 90 per cent bookings through its direct transaction on the web and the mobile phone.
The challenge is tough. But Agarwal sounds confident. "You must realise we are just one and a half years old and there's huge learning we have to go through," he said recently.